Among emerging economies, South Africa has particular potential for solar power because of the country’s excellent solar resources. While fossil fuel power generation currently provides over 90% of its electricity, South Africa is seeking to reduce its reliance on carbon-intensive coal-based energy.
The Government of South Africa (GoSA) has developed policies to transition to a clean and sustainable energy system. In order to exploit its abundant renewable energy resources, South Africa has adopted an ambitious plan to add 20 GW of new renewable power generation capacity by 2030 (almost 50% of current generation capacity). Of this, 3.3 GW is expected to be from concentrated solar power (CSP). This is approximately equal to the current installed capacity of CSP worldwide.
CSP is a promising energy technology for low-carbon energy systems as, in combination with thermal storage, it can store solar energy in the form of heat to deliver clean power when it is most needed. It offers a real chance to act as a viable substitute for coal-based energy. Despite its potential, CSP technology lacks a long deployment track record and still comes with high technology risks, which translate to higher financing and overall costs. This means that most projects need public assistance in the form of low-cost public finance or political support to be bankable.
South Africa’s state-owned electricity utility Eskom is currently planning to install its first CSP power plant in Upington in the Northern Cape region of South Africa. In a recent Climate Policy Initiative (CPI) case study, conducted with support from the Climate Investment Funds Administrative Unit, CPI examined this plant to understand how public support helped advance this project. It also looks at the financial and technological challenges for Eskom and the reasons behind the extended project development time.
Eskom CSP remains one of the most ambitious CSP power tower projects under development anywhere outside of the U.S. with respect to its technology choice, capacity and storage. After several years in development, the project was placed on hold in 2009 during the global recession, largely because reduced access to capital and increased pressure from GoSA to improve the country’s energy security at low cost led Eskom to reassess its investment priorities.
But in the same year, the Clean Technology Fund (CTF) assigned USD 500 million in concessional financing to South Africa for clean energy-related investment, 60% of which was targeted at CSP. The investment plan allocated significant funding to Eskom CSP and thus put the project back on track. Since then, six international financial institutions (IFIs) have committed to provide USD 995 million in concessional loans - allowing the project to proceed while lowering the financing costs.
While enabling Eskom CSP, loans from IFIs have also resulted to additional challenges which Eskom needs to manage. Our research found three issues in particular that if successfully addressed by the appropriate actors would speed the implementation of projects and lower their costs:
- Costs due to exchange rate fluctuation have to be reduced since they can significantly reduce the benefits of the lower interest rates provided by IFIs’ concessional loans. This is a risk that needs to be managed jointly by project sponsors and lenders.
- IFIs need to be flexible in their procurement requirements because such projects involve early and innovative technologies and only a few suppliers can consistently provide what is necessary.
- Each IFI has different administrative requirements. Harmonizing these policies and procedures in cases where multiple IFIs are lending to a project will help reduce the burden on the client.
As Eskom CSP progresses towards commissioning in 2019, the project is expected to deliver technology-learning and cost-reduction that could lead to replication and scaling up of projects in South Africa and beyond.
You can learn more about the CPI/CIF research into CSP here
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